The American Dream of owning a home has greatly changed in the last fifty years. For instance, second or vacation homes are now a part of the American dream. But these cottages on the water, hill cabins, and beach shacks are often empty for 90 percent of the year because their owners are saving money for their next vacation and paying their home loans and property taxes. When you can't use your vacation home, you don't have to let it sit empty. You could instead rent it out to people who need a break from the office. Renting could be an excellent way to make money, but you should consider how it will affect your taxes. So let us see is a vacation home or income-producing investment for you.

How to Get a Second House

It's a big financial decision to buy a second home and keep it in good shape. The IRS doesn't let you write off as many costs for a second home because it costs the same or more than your first home. If you want to buy a second home, one of the first things you need to decide is whether you'll get a mortgage or pay cash. Find out how much interest lenders in the area where your vacation home is located charge by using a mortgage calculator. This will help you decide what to do.

If you want to buy a vacation home but don't have enough cash, you should know that the IRS has locked the loophole that lets you utilize a 2nd home plan to buy a distinct investment home and still deduct your payments as personal mortgage interest. If you want to borrow money for a second home, you'll need another mortgage that lets you deduct interest from your taxes.

How the IRS Feels About Buying a Vacation Home

If you rent your home for less than 15 days, you don't have to report the money to the government. But the IRS sees a second home as an investment property if you only live there for less than two weeks and then try to rent it out the rest of the time. It's important to remember that people may only want to rent your cabin in the woods when it's busy, which is probably when you want to use it yourself.

It doesn't look like the IRS knows how to deal with second homes. "Hobby losses" or even "passive losses" are all the money you lose from renting. These may only be deducted against income from those other inactive operations, like other rentals, a limited partnership that you do not manage, or an S-corporation. If you cannot use passive losses, they are held over till the vacation property is sold. Once you sell property, you may utilize your previous losses to offset any gains. After selling the property, if you have more passive loss write-offs, you can use them to lower your regular income.

Selling a Vacation Home

Properties in popular vacation spots tend to go up in value faster than average, so you may want to cash out and sell at some point. The time you've held a vacation house influences your property sales tax. When you sell anything within a year, you must incur the quick property gains rate. When you sell after the first year, you will pay federal taxes at the long-term property gains rate.

You can get out of it, though, if you are willing to move. If you sell your main home and use the $249,999 tax-free exemption per person, then move into your vacation home and call it your new primary home, you can use the $249,999 tax-free exemption again as long as you live in the former vacation home for two years. Sad to say, this plan usually only works for people who are retired or self-employed. Also, there are other guidelines about how the capital gains exclusion can be used for second homes that have been turned into main homes.

Tips For A Person Buying A Second Home

If your AGI is less than $149,999 and you own a second home to rent, you should get in there and start taking care of it. You can't hire an agent to help you find tenants. You will have to pay for the repairs, but you can write them off as passive losses.

If you don't like being in charge or your AGI is too high, you should stop using the cabin as an investment property and spend more time there. This means your taxes will change when you change your designation, mainly because you can't use passive losses. But you can deduct some of your mortgage interest and property taxes from your taxes.